Wednesday 8 March 2017

Reflections on rate changes

US equity indexes closed moderately weak, sp -6pts at 2368. The two leaders - Trans/R2K, settled lower by -1.1% and -0.7% respectively. VIX settled +1.9% at 11.45. Near term outlook offers threat of 2350, but a weekly close in the sp'2400s is very much within range.




There is little to note about today. Price action was leaning weak for almost the entire day, but again, the equity bears simply can't manage anything sustained/significant.

VIX itself is naturally subdued. If the fed do raise rates next week, perhaps a brief spike to the mid teens.. but most should realise anything close to the key 20 threshold looks out of range.

Interest rates and equities

I've been noting lately to a few people, that one of the most bearish signals for the economy and equity market will (ironically) be when the fed start cutting rates.


Scroll down to 'historical actions'. In particular, look to Aug'2007, when the fed first lowered the 'discount rate' by 50bps to 5.75%. That was the very first warning. By Jan'2008, the fed were in borderline panic mode.

US fed funds rates and the sp'500

Without going over the 2007/09 horror story in full... the point should be clear. It was the around the time that the fed started cutting rates that the equity market peaked (Oct'07). Conversely... as the fed raise rates, that is (almost always) a bullish signal.

Rates still look set to increase across this year. However, the moment the fed do cut, I'll be the first one to sound the alarm bells. The natural target would be the sp'1600/1500s, at which point the printers will be spooling up for QE4. Perhaps the only uncertainty will be who exactly hits the PRINT button, as Yellen is set to be replaced in Jan'2018.

Goodnight from London

For those with an interest in the precious metals and related mining stocks...

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